In the last week, we have heard all sorts of nonsense in the media about how the various cuts to the federal budget from sequestration will hurt economic growth. The truth is that the cuts will have far from a uniform effect. Let's break the entire subject down:
1) Cutting the budget deficit will encourage those who have been holding back on investment because they were worried that America was not serious about living within its means. To the extent that these budget cuts encourage investment, they will boost economic growth rather than shrink it.
2) There are also other positive impacts from the budget cuts. These include the likelihood of keeping interest rates lower for longer as the need for borrowing by the federal government is reduced and also the increased ability of the private sector to use the cash now left in that area over the long run rather than being taken by the federal government.
3) Some of the cuts made to federal spending will have no adverse impact on the economy whatsoever. For example, cuts to foreign aid will leave the American economy essentially untouched.
4) Some of the cuts to federal spending will have little negative impact on the economy and growth, indeed that impact ought to be much less than the positive effects mentioned above. A good example of these cuts are the downsizing of the armed forces. If the military cuts 50,000 personnel from its ranks, that will certainly put this group into the private work force looking for jobs. On the other hand, it will mean that many folks with highly marketable skills that are in short supply will now be available to be hired by American companies that will result in an increase in economic output. Another example of this type of cuts is the money spent on research projects that are unneeded like the study of sexual habits of Syracuse University coeds that was funded by the Stimulus law (no pun intended.) Similarly, projects like the green energy initiative which invested billions of federal dollars into energy projects that cannot exist absent continuing long term subsidies could be cut with little, if any, negative impact on economic growth.
5) The only federal spending which, if cut, would have a real negative impact on economic growth and job creation are expenditures on real investments like new roads, bridges, airports and other items that help the American economy to function better. To be clear, when I speak of investments, I am using that word as it ought to be used. I am not adopting the Obama redefinition of "investment". Obama has stopped speaking of spending. Everything the federal government now does is called an investment by Obama. Providing free cell phones to those on welfare is not an investment. Nor is auditing of tax returns by the IRS.
The overarching point here is this: there is a better way to cut federal spending than the sequestration. Logically, the best procedure would be for Congress to agree on just which programs were to be cut and by just how much. Sadly, although the House GOP has twice passed bills that make exactly such cuts, the Democrats in the Senate have not even bothered to consider the issue. President Obama has also done nothing except to call for further tax increases after winning an extraordinarily large tax increase just a month ago. That leaves Sequestration. Overall, the impact of Sequestration is likely to be highly positive for the economy in the long run. There will be some dislocations in the next few months, but two years from now the economy will be larger with Sequestration that it would have been without it.
1) Cutting the budget deficit will encourage those who have been holding back on investment because they were worried that America was not serious about living within its means. To the extent that these budget cuts encourage investment, they will boost economic growth rather than shrink it.
2) There are also other positive impacts from the budget cuts. These include the likelihood of keeping interest rates lower for longer as the need for borrowing by the federal government is reduced and also the increased ability of the private sector to use the cash now left in that area over the long run rather than being taken by the federal government.
3) Some of the cuts made to federal spending will have no adverse impact on the economy whatsoever. For example, cuts to foreign aid will leave the American economy essentially untouched.
4) Some of the cuts to federal spending will have little negative impact on the economy and growth, indeed that impact ought to be much less than the positive effects mentioned above. A good example of these cuts are the downsizing of the armed forces. If the military cuts 50,000 personnel from its ranks, that will certainly put this group into the private work force looking for jobs. On the other hand, it will mean that many folks with highly marketable skills that are in short supply will now be available to be hired by American companies that will result in an increase in economic output. Another example of this type of cuts is the money spent on research projects that are unneeded like the study of sexual habits of Syracuse University coeds that was funded by the Stimulus law (no pun intended.) Similarly, projects like the green energy initiative which invested billions of federal dollars into energy projects that cannot exist absent continuing long term subsidies could be cut with little, if any, negative impact on economic growth.
5) The only federal spending which, if cut, would have a real negative impact on economic growth and job creation are expenditures on real investments like new roads, bridges, airports and other items that help the American economy to function better. To be clear, when I speak of investments, I am using that word as it ought to be used. I am not adopting the Obama redefinition of "investment". Obama has stopped speaking of spending. Everything the federal government now does is called an investment by Obama. Providing free cell phones to those on welfare is not an investment. Nor is auditing of tax returns by the IRS.
The overarching point here is this: there is a better way to cut federal spending than the sequestration. Logically, the best procedure would be for Congress to agree on just which programs were to be cut and by just how much. Sadly, although the House GOP has twice passed bills that make exactly such cuts, the Democrats in the Senate have not even bothered to consider the issue. President Obama has also done nothing except to call for further tax increases after winning an extraordinarily large tax increase just a month ago. That leaves Sequestration. Overall, the impact of Sequestration is likely to be highly positive for the economy in the long run. There will be some dislocations in the next few months, but two years from now the economy will be larger with Sequestration that it would have been without it.
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